Casino Not Liable to Return Proceeds of Fraudulent Transfers

In most bankruptcy cases where the business is being sold or liquidated, the two primary sources of funds for distribution to creditors are sale proceeds and avoidance claim recoveries from preference and fraudulent transfer actions. Fraudulent transfer actions can be quite complex. Interesting issues arise when the defendant is not the initial recipient of the fraudulent transfer from the debtor, but rather a subsequent recipient of those funds. In many of these cases, the subsequent transferee never did any business with the debtor itself, actually extended value to the initial recipient of the fraudulent transfer, and found itself embroiled in litigation with the bankruptcy trustee of the debtor’s estate. Such a situation was recently reviewed by the U.S. Court of Appeals for the Seventh Circuit in Brandt v. Horseshoe Hammond LLC, Case No. 14-2174 (7th Cir. Oct. 13, 2015). In this case, the court reviewed whether a bankruptcy trustee could recover over $8 million from a casino where the debtor’s principal gambled regularly for years with funds fraudulently transferred to him and his wife from the debtor. While the court ultimately affirmed the district court’s grant of summary judgment in favor of the casino, this case illustrates the dangers of unknowingly dealing with recipients of fraudulent transfers.

Fraudulent Transfers to Principal Spent at Casino

For those practitioners who have been in practice for many years, we observe that ever since the infamous case of O.P.M. Leasing Services, periodically fraudulent schemes are perpetrated using an equipment financing business. According to the opinion in Brandt, the debtor, Equipment Acquisition Resources Inc. (EAR), defrauded its creditors in a fraudulent equipment financing scheme. As a result, EAR’s principal, Sheldon Player, and his wife received approximately $17 million in fraudulent transfers from EAR. The opinion does not describe the scheme in detail, but notes it was not easily detectable. After EAR appeared to be in financial distress, FTI Consulting, a well-known forensic accounting and consulting firm, was engaged and uncovered the fraud about three months later. Once the fraud was discovered, EAR’s board and officers resigned, and its shareholders elected William Brandt, a well-known restructuring specialist, as the sole board member and chief restructuring officer. EAR filed a Chapter 11 case about a month later. Brandt was ultimately appointed the bankruptcy court-appointed plan administrator.